This week’s Chart is a vivid illustration of the power of leverage, in both directions. George Soros’ term “reflexivity“ comes to mind when one looks at the forced selling that occurred in July in many of the high flyers that had done so well in recent years... and it may have been catalyzed by a single hedge fund.
A 25-year-old with no trading experience took a fund from roughly $225 million at launch in 2024 to as much as $45 billion by early July. Through June 30 it was up 439%. In a matter of days near the end of July, the whole public book was gone, sold in a single pre-market block to Ken Griffin’s Citadel at a discount.
That’s Leopold Aschenbrenner’s Situational Awareness, and the cause of death matters more than the headline. This is a textbook example of the perils of excess leverage and a lack of risk control in portfolio construction.
The investment thesis was defensible. Long the picks-and-shovels of AI (SK Hynix, Micron, CoreWeave, Nebius, SanDisk), short the software names he figured AI agents would hollow out (Adobe). Reasonable people own some version of that trade. Plenty do.
The 4x is what turned a rough month into a liquidation.
Here are the mechanics, in plain English.
When you borrow three dollars for every one of your own, a 20-25% drop in your book doesn’t dent your equity, it erases it. At that point your prime broker stops asking politely.
Goldman, JPMorgan, and Bank of America issued margin calls, and when a call can’t be met, the broker sells your positions for you, at whatever price clears, right now. Leopold’s longs were off 35% or more on the month while the Adobe short went against him at the same time.
Squeezed on both sides, with borrowed money magnifying every tick, you don’t get to wait for the thesis to play out.
The part that should stick with you: six days before Citadel took the book, Aschenbrenner told his investors that July’s selloff offered “some of the most attractive opportunities since early 2025” and asked them to wire fresh capital by August 1. He may even have been proven right in time. It didn’t matter. The money never showed, and the forced de-leveraging began.
Keynes had it right a century ago. The market can stay irrational longer than you can stay solvent. Solvency is the whole game. Being right about AI in 2030 is worth precisely nothing if an unmet margin call liquidates you in week three of the drawdown.
Now we return to this week’s Chart, because this is where it stops being about one cocky kid and starts being about the equity market in general.
The Chart shows assets and net exposure of US-listed leveraged ETFs. Asset levels recently touched a record near $200 billion, up about 55% in a matter of months, and net exposure ran past $450 billion. Roughly 85% of it is held across the general AI investing sector. The same trade Aschenbrenner ran, wrapped in a ticker any investor can buy.
Many of these products carry Situational Awareness’s fatal reflex written into the prospectus. A 2x or 3x fund has to rebalance every single day to hold its target exposure. When the underlying rises, it buys more. When it falls, it sells. By prospectus, it is contractually required to sell into weakness, the same forced selling a margin call produces, except automated and running across millions of accounts at once. Daily rebalancing flows hit a record $50 billion this year, quadruple where they started 2026, and now amount to something like 1.6% of all S&P 500 futures volume. On a down day, that’s a wall of mechanical selling that arrives exactly when the tape is already soft.
One fund blowing up is a story. A structural bid that flips to a structural offer the moment stocks fall is a market feature, and it’s a lot bigger than $45 billion.
So here are my two (unlevered) cents. Leverage is effectively a promise to sell at the worst possible moment. It takes a temporary loss, the kind a patient investor rides out, and turns it into a permanent one, because you no longer control the timing of your exit. The broker does. Or the fund’s rebalancing rule does. You’re a passenger.
When an investor is approaching retirement, or already there, the order in which their losses arrive matters more than their magnitude. While a risk-management first approach to investing is much less thrilling than 439%, it also leaves an investor still standing in August.
The irony writes itself. The Wunderkind named the fund, and the viral essay behind it, “Situational Awareness.” The one thing 4x leverage guarantees is that you lose exactly that, right when you need it most, because at the bottom you’re not the one driving anymore.
So if you’re levered up, buckle up. It’s a long drive, and the road’s wet.
Sources: CNBC: Situational Awareness fire sale · CNBC: why the fund imploded · CNBC: forced to unwind all public positions · SpotGamma: Anatomy of a Margin Call · Benzinga: Leveraged ETF rebalancing hits $50 billion · ETF.com: Leveraged ETFs in 2026